Recently our friends at Aberdeen Research compiled their findings on the outlook for manufacturing (Manufacturing Industry Outlook, January, 2013), after a variety of leading manufacturers such as Mercedes Benz Fuel Cells, ABB Inc., and Mercury Marine convened the Manufacturing Industry Leadership Summit. Their conclusions were presented in a paper published recently.

We’ll save you the cost of the summit and cut to the chase, with a few excerpts from Aberdeen’s compilation of recommendations and ideas to support a successful strategy for collaboration:

Good results belong to everyone – Collaborative execution includes all functions, multiple sites and a global perspective

There is no change without leadership – The journey needs vision, roadmap, influence, drive and budget.

Identify the right fit – Understand your culture. The approach depends on the makeup, values and behaviors of your organization.

Focus on a key activity (or a limited few) – Whether it’s innovation, efficiencies, quality, risk, safety or technology, a core set of disciplines can define how to best create value for customers.

Take control of the complexity – Look into automation… to simplify processes. Integrating products and production process can be a good starting point.

Leverage assessments – To help find gaps or at least benchmark where your organization is currently operating.

Performance improvements – Simple metrics with the right incentives. Use metrics in a simplified way and stick with them.

Invest in collaboration – From technology, to time and people, collaboration requires a free flow of information but also training, support, and executive commitment.

Sounds simple, even intuitive, right? But it’s a process, a method, and a commitment to continuous improvement in search of the best way to provide value for your customers. Get learning. Get understanding of what matters inside your company. And then, get to work.

In this series of posts we’ve discussed the importance of enterprise software to businesses, and how (and why) they need ERP to earn the right to be called Best in Class.

So what exactly does Best in Class mean?

In the Aberdeen Research survey we’ve been discussing these past few posts, they’ve defined four key performance criteria that lead to a company be classified as either:

Best in Class (Top 20%)

Industry Average (Middle 50%)

or Laggard (Bottom 30%)

Here’s how companies in each class perform across four key indicators:

1. If you’re best in class, you close the books quickly each month in order to get fast and strong visibility over key financial health metrics. You take only about two and a half days to close your month on average. Industry average firms require a week. Laggards require almost nine days.

2. If you’re best in class you turn receivables quickly, which means your cash flow is better, and you’re that much less reliant on external financing. You collect your Days of Sales Outstanding (DSO) in half the time of the laggards (and about 25% faster than the average company).

3. If you’re best in class, your customers are happier and better served, because you’re delivering on average 96% complete and on-time. An average company achieves “complete and on-time” 88% of the time, and the laggards less than 80%.

4. And finally, if you’re best in class, your operating margins on average have grown by 21% over the past two years. Average firms achieved only half that. And laggards have shown no growth in operating margins over the past two years.

And because of their success in those four key criteria derived from ERP, the best in class firms will have:

Lower administrative and operational costs

Improved on-time delivery

Increased speed in decision-making

Increased customer satisfaction

An improved sales pipeline

Better knowledge, visibility and collaboration

Just some of the rewards from implementing an ERP system… and eventually becoming Best In Class.

In our two prior posts (the first here, the second here) we’ve been talking about how small to midsize businesses use business management software to improve their operations, cut costs, and move toward a benchmark status of “best in class” company.

Today, a quick recap of a few key benefits – the reasons companies need ERP:

1. As noted in our previous post, over three-fourths of these “best companies” use ERP and report “better than average” customer satisfaction. What better way to attain best in class status?

2. An ERP implementation can have a dramatic effect on how well you serve your customers. Moreover, done right, ERP can include self-service components, thus achieving the holy grail of being easier to do business with even as you are cutting your costs to do so. Self-service items like customer portals to check order status and automatic triggers for customer notifications are just two areas where software can fully automate an otherwise manual (i.e., human) function which, quite frankly, all too often doesn’t get done – or doesn’t get done well.

3. Operational efficiencies gained by ERP deployment (like order tracking and scheduling, among many others) impact your standing with your customers as well as your ability to cut costs.

4. As you streamline processes, you can improve response times. And again, you can do this, even as you reduce costs.

5. You gain more visibility into business processes – everything from production work-in-process to quote-to-cash monitoring, from sales pipeline visibility to repair and warranty tracking. In reporting. In queries, inquiries and drilldowns. It’s all about improved visibility for management.

6. The process of implementing ERP, when done right, necessarily includes the analysis required to properly align your strategy, your technology, and your software. So you find yourself aligning business capabilities with business requirements — as you prepare to follow through then with ERP software.

These are some of the ways companies get to “best-in-class.” In all these areas and more, ERP software is the tool that guides your business, the engine that keeps the other parts moving, the lifeblood that guides and monitors day to day activities.

Whether a company is a “laggard” as defined in the Aberdeen Group’s report entitled ERP in Manufacturing 2010: Measuring Business Benefit and the Time to Value, or an “industry average” firm looking to move up to Best in Class, certain actions need to be performed in order to spur the necessary improvement. We’ll look at those in this installment.

The 2010 Aberdeen survey concluded that among actions the “laggards” should take to catch up are:

Assign ERP ownership to line of business executives who stand to gain the most benefit from the implementation. Laggard businesses stop short of achieving cost reductions and business improvement goals. So assign specific responsibility to an executive measured by these criteria.

Establish specific goals for obtaining business benefits from ERP – and measure progress. Only 15% of Laggards quantify the business benefits of ERP. Others fail to measure reductions in inventory or manufacturing or administrative costs. 100% of Best in Class companies measure all of these.

Measure time to value. Best in Class companies are twice as likely to measure the time it takes to recapture value from their ERP deployment in real dollar terms. While improvement is ongoing and ERP is never “done” it is important to track time and costs relative to realized value and payback.

Meanwhile, the companies in the mid-tier “industry average” category, striving to become “best in class” should take the following actions:

Take advantage of tools that review summary data and that provide dashboards and drill-downs. Best in Class firms know that this type of visibility, now usually provided directly within ERP software, makes a tangible difference in monitoring and improving business performance.

Coordinate, collaborate and continuously improve.

Broaden and deepen ERP usage. This is a recurring theme in ERP: Best in Class manufacturers make broader and deeper use of ERP, in terms of number of modules implemented and functionality deployed.

Don’t let maintenance dollars go to waste. Another recurring theme: Stay current on your software and the new innovation each new release provides. Best in Class manufacturers are twice as likely to be current in their software as are industry average firms.

Finally, if you already are Best in Class, take action to:

Improve real time visibility into the entire quote to cash process.Automatically notify decision makers when certain scheduled activities fail to occur as planned. Having visibility and taking action are often two different things.

Manage by exception. You must be notified in real time as exceptions occur in order to react immediately. Event triggers in ERP software make both these actions possible today.

By following the principles outlined in this series of five posts, manufacturing firms – already leaders in ERP deployment – can enjoy much greater gains in efficiency and profit improvement. Take the steps outlined here to begin your own path to Best in Class. It’s worked for others. It will work for you.

And of course [shameless plug] If you need assistance, firms like ours are here to help.

The entire Aberdeen Group manufacturer’s survey we’ve been reviewing in this and our prior three posts covers a lot of ground. You can read the full report here at your leisure. We simply want to recap some of what we found to be the key lessons that any manufacturer would do well to note.

One of the highlights was the correlation between firms that were deemed Best in Class (as defined in our first post in this series) and the idea that these firms measure their performance (with the goal of improving that performance, of course).

Companies that measured their improvements and were among Best in Class found those improvements as follows:

20% reduction in operating cost

18% reduction in administrative cost

22% reduction in inventory cost

17% improvement in complete and on-time shipping

18% improvement in manufacturing schedule

Meanwhile, “Average” companies saw improvements of roughly two-thirds the above figures. And the improvement by “Laggard” or lowest-performing companies was only about one-fourth of the Best in Class.

One reason: The Best in Class made a point of measuring their results. The Average and Laggard firms perceived an increase in performance, but the Best in Class companies measured theirs. And without being able to measure and monetize those results, company managements are often hard pressed to justify continued investment in their systems.

While some operational improvements might be only indirectly related to ERP implementation, others can be more directly attributed. When Aberdeen looked at a long list of improvements (like the five noted above, plus areas like: reduction in waste, increased profits and revenues, reduced decision times, reduced headcount, and so on), it found that companies who measured their results could make a direct correlation to improvement in areas such as inventory costs and production throughput. That’s because those types of improvement are the direct result of process improvements that are streamlined and improved by ERP. These in turn result in better on-time and complete delivery.

Ultimately, those who measure and improve continue to invest in their systems, continue to improve, and thus create a continuous improvement loop that gradually separates them from their competitors… until they end up in (or remain)… Best in Class!

A key finding in Aberdeen’s ERP Manufacturer’s Survey was how in years past manufacturers failed to take full advantage of the capabilities of their systems. (As ERP implementers, we see this all the time: a flurry of activity to get basic processes implemented, coupled with some effort to cut cost by minimizing training, and all too often, a corresponding stagnating over time of any continued efforts at improvement.)

Interestingly, Aberdeen found in this year’s study that manufacturers who qualified as Best in Class (see what that meant in our first post of this series, here) achieved significant progress in taking greater advantage of their systems and by getting access to information directly into the hands of key decision makers. Here again, all too often we hear that “information is difficult (or impossible) to get out of our system” especially from businesses running older software, or software not really fit to their business.

Well, the best companies are making real progress here. In many cases, they’re doing that by making sure they modernize their tech infrastructure. That means upgrading software when upgrades become available. Subscribing to maintenance plans. Or, where necessary, moving to more modern systems altogether.

While ERP solutions today increasingly embrace lots of new ‘ease of use’ technologies, those stuck on older systems with older technologies find themselves unable to take advantage of the technology… and thus unable to get access to the information they need to make good decisions… and ultimately, limiting their ability to become Best in Class in their own right.

In short, they can’t execute against strategies aimed at improved performance, because their systems won’t support it.

This may be why last year, for the first time, the average age of ERP implementations actually shrunk. This reflects an increase in replacements and first time implementations. It means companies are beginning – for the first time in years – to embrace the newer ERP technologies, and with them, the ability to improve operations and workflow, and provide better, faster access to key information — all necessary components of growing the business.

The survey also showed that, increasingly, smaller companies are investing in ERP. Some are doing so for the first time, and some are replacing outdated systems that in many cases were deployed around the Y2K (year 2000) threshold.

However, the report points out, ERP age is only part of the story. Sustained innovation is necessary if the ERP solution is to continue to serve the needs of the organization. Business needs change as companies grow and evolve. A business system with a long history may also be based on older, inflexible (or outdated) technologies that are simply not capable of taking advantage of many of the components of today’s wired and web-enabled world (for example, SOA).

At the very least, companies need to recognize the importance of staying current, or “on maintenance” with the systems they do have today, if they plan on keeping them. One final point in today’s thread: the survey shows that Best in Class companies are over 100% more likely to be on the latest release of their software than lesser companies. Companies that are better positioned to take advantage of the full stack of their current solution’s capabilities are simply “better positioned to compete.”

In our next post, we’ll look at benchmarking requirements for success.

The title of this series of posts comes from idea noted in our first post on the topic that manufacturers lead all other industries in the adoption of Enterprise Resource Planning systems – and benchmarking their results, we might add – by a factor of two to one. Hence, manufacturing leads when it comes to deploying automation technology that leads to “Best in Class” performance. In today’s post, we’ll look at the business drivers, or motivators, for that push into ERP.

Three key business drivers emerge from Aberdeen’s survey of over 700 managers at over 400 manufacturers:

Cost reduction

Customer service

Growth

These drivers have been consistent across five years’ worth of Aberdeen surveys. In the most recent survey in fact, cost reduction rose to the number one factor – no surprise in light of the recession.

Cost reduction was the key driver in the small to mid-size (or “SMB”) business market – that’s our market space. Larger companies (revenues over $1 Billion) had other concerns, namely interoperability across multiple operating locations, but our audience is mostly comprised of the smaller firms in this demographic, so we’ll stick with these for our analysis in these posts.

As the Aberdeen results point out “cost reduction could spell the difference between survival and failure.” Second most important as a business driver to use ERP was the fact that SMBs are under increased pressure to “be responsive and easy to do business with.” Finally, smaller companies have specifically targeted last year and this year for aggressive planned growth.

Most know that ERP is a critical foundation for that growth.

Strategies

In order to relieve the “must reduce costs” pressure, Best in Class companies found it necessary first to streamline and accelerate business processes, and then to standardize those processes. Additional strategies involved optimizing the use of current capacity; providing visibility across functions or departments; and modernizing tech infrastructure.

Some of the capabilities required to help reduce those costs included integrated business applications as a system of record. Noted secondly was standardized enterprise-wide procedures for key functions like sales, procurement, production planning, cash collection and financial reconciliation.

What immediately jumps out is that you can’t have the second without the first.

Also cited was the ability for managers to drill down on key data points to enable better, faster decision making, and that the line of business ultimately “owns” the success or failure of the ERP implementation.

A fifth, key point that was clearly important to the Best in Class: Quantifiable business benefits that are the result of measured ERP benefits.

Next up: the importance of taking full advantage of your system’s capabilities, and staying current with your software.